USA stocks turn higher on Fed minutes; dollar recovers slightly

Was Post Fed Chair Speech Rally a Market Overreaction

A few participants also expressed reservations about the timing of the next rate hike, suggesting that the benchmark rate - which determines the cost of borrowing on credit cards, mortgages and other loans - may now "be near its neutral level" and "further increases" could slow down the economy's expansion.

But minutes from the Fed's November 7-8 policy-setting meeting, released on Thursday, as well as remarks over the last two weeks, point to a reassessment of the Fed's longstanding promise of "further gradual rate increases" that would extend two years of almost uninterrupted quarterly tightening.

The Dow Jones Industrial Average rose 98.22 points, or 0.39 percent, to 25,464.65, the S&P 500 gained 8.26 points, or 0.30 percent, to 2,752.05 and the Nasdaq Composite added 23.33 points, or 0.32 percent, to 7,314.93. Fed forecasts from September showed policymakers expected to raise rates a bit above 3 percent by around 2020, according to the median. But after that, officials said further hikes would not be on a preset course.

Next month's expected quarter-point increase would lift the central bank's target for the federal funds rate to a range of 2.25 per cent to 2.5 per cent.

The transition comes as the Fed's target policy rate, left at 2 percent to 2.25 percent in November, grinds closer to the 2.5 percent to 3.5 percent range of Fed officials' views of where a rate that neither boosts nor cools a healthy economy lies.

Paul Ashworth, chief US economist at Capital Economics, said he expects two rate hikes in 2019, not the three the Fed has been projecting for next year.

Powell unnerved investors on October 3 when he said in an unscripted comment that Fed policy probably was "a long way from neutral" and might eventually have to turn restrictive. That is not what he said.

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Just on Tuesday, Fed Vice Chair Richard Clarida, in a speech to numerous same economists and investors in NY, used precisely the same language to describe the policy rate as "just below" the range for neutral.

Markets are now trying to divine Powell's plans from data pulling in two directions - rising wages that could be a precursor to inflation, for example, compared to slowing growth and falling oil prices that may keep inflation down, or other indicators clouding the picture.

"Powell's comment that the benchmark funds rate is "just below the broad range of estimates of the level that would be neutral for the economy" was enough to spark a strong bounce in United States equities, while the 10 year yield briefly dipped below 3% for the first time since mid-September".

"The unemployment rate is 3.7 percent-a 49 year low, and many other measures of labor market strength are at or near historic bests", he said. "We know that moving too fast would risk shortening the expansion".

After the release of the Fed's meeting minutes, traders of interest-rate futures stuck to their bets that the Fed would slow rate hikes next year, to just one. "Our path of gradual increases has been created to balance these two risks".

One additional twist investors will need to adjust to next year will be the potential for rate changes at any of the Fed's monthly gatherings. Investors had been anxious that too many rate hikes at too fast a pace would raise the cost of borrowing across the board, from mortgages to auto loans.

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